nep-mac New Economics Papers
on Macroeconomics
Issue of 2016‒05‒14
74 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Macroprudential regulation, credit spreads and the role of monetary policy By Tayler, William; Zilberman , Roy
  2. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  3. The rise of the service economy and the real return on capital By Miguel Leon-Ledesma; Alessio Moro
  4. Liquidity Trap and Stability of Taylor Rules By Antoine Le Riche; Francesco Magris; Antoine Parent
  5. Colonial American Paper Money and the Quantity Theory of Money: An Extension By Farley Grubb
  6. Neoclassical Models in Macroeconomics By Gary D. Hansen; Lee E. Ohanian
  7. The Limited Macroeconomic Effects of Unemployment Benefit Extensions By Gabriel Chodorow-Reich; Loukas Karabarbounis
  8. Deep Recessions and Slow Recoveries By Tatiana Kirsanova; Charles Nolan; Maryam Shafiei Deh Abad
  9. Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model By Julio Garín; Robert Lester; Eric Sims
  10. Digital Currencies, Decentralized Ledgers, and the Future of Central Banking By Max Raskin; David Yermack
  11. Disoccupazione strutturale in Italia e regole europee di bilancio By Alessandro Cianci
  12. Should Monetary Policy Lean Against Housing Market Booms? By Sami Alpanda; Alexander Ueberfeldt
  14. Financial Frictions in Production Networks By Saki Bigio; Jennifer La’O
  15. The macroeconomics effects of the implementation of the euro in Poland in relation to the experience of other countries By Bajan Bartlomiej
  16. Non-durable Consumption and Housing Net Worth in the Great Recession: Evidence from Easily Accessible Data By Greg Kaplan; Kurt Mitman; Giovanni L. Violante
  17. How can it work ? On the impact of quantitative easing in the eurozone By Roberto Tamborini; Francesco Saraceno
  18. How can it work ? On the impact of quantitative easing in the Eurozone By Roberto Tamborini; Francesco Saraceno
  19. Inflation Expectations and the Stabilization of Inflation : Alternative Hypotheses By Nalewaik, Jeremy J.
  20. Macroeconomics of Persistent Slumps By Robert E. Hall
  21. Differences of Opinion, Liquidity, and Monetary Policy By Johnson, Christopher
  22. Animal Spirits in a Monetary Model By Roger E.A. Farmer; Konstantin Platonov
  23. ¿Están ancladas las expectativas de inflación en Colombia? By Santiago Gamba Santamaría; Eliana Rocío González Molano; Luis Fernando Melo Velandia
  24. Has Globalization Really Increased Business Cycle Synchronization? By E. Monnet; D. Puy
  25. Housing and Tax-Deferred Retirement Accounts By Anson T. Y. Ho; Jie Zhou
  26. Are experts’ probabilistic forecasts similar to the NBP projections? By Halina Kowalczyk; Ewa Stanisławska
  27. Cashless Payments and the Persistence of Cash: Open Questions About Mexico By Gustavo A. Del Angel
  28. Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report? By Wickens, Michael R.
  29. Global firms By Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
  30. "Maximizing Price Stability in a Monetary Economy" By Warren Mosler; Damiano B. Silipo
  31. Families in Macroeconomics By Doepke, Matthias; Tertilt, Michèle
  32. Joint prediction bands for macroeconomic risk management By Farooq Akram; Andrew Binning; Junior Maih
  33. Regional Banking Instability and FOMC Voting By Stefan Eichler; T. Lähner; Felix Noth
  34. Job Displacement Risk and Severance Pay By Marco Cozzi; Giulio Fella
  35. Capital Adequacy Regulations in Hungary: Did It Really Matter? By Dóra Siklós
  36. The influence of financial markets on economic growth By Kamil Pastor
  37. The Costs to Different Generations of Policies That Close the Fiscal Gap: Working Paper 2015-10 By Felix Reichling; Shinichi Nishiyama
  38. The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency By Asongu, Simplice; Tchamyou, Vanessa
  39. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  40. Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations By John B. Taylor; Volker Wieland
  41. Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
  42. A discussion of key secular trends, economic conditions and monetary policy. Remarks at the Official Monetary Policy and Financial Institutions Forum, London, April 29, 2016 By Kaplan, Robert Steven
  43. Die Produktivität Österreichs im internationelen Vergleich By Klaus Weyerstraß
  44. Temporary Agency Work and the Great Recession By Daniel Baumgarten; Michael Kvasnica
  45. Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution By Martin M. Andreasen; Kasper Jørgensen
  46. Rising Population and Food Insecurity Linkages in Pakistan: Testing Malthusian Population Growth Theory By Ahmad, Khalil; Ali, Amjad
  47. On the Existence and Uniqueness of Stationary Equilibrium in Bewley Economies with Production By Acikgoz, Omer
  48. A New Approach to Identifying the Real Effects of Uncertainty Shocks By Shin, Minchul; Zhong, Molin
  49. Macroeconomic and Institutional Determinants of Capital Structure Decisions By Marco Botta; Luca Colombo
  50. Modelling and Forecasting Mortgage Delinquency and Foreclosure in the UK By Aron, Janine; Muellbauer, John
  51. On the Optimal Lifetime of Real Assets By Bitros, George C.; Flytzanis, Elias
  52. Price Convergence Patterns across U.S. States By Christina Christou; Juncal Cunado; Rangan Gupta
  53. Altcoins By Anna Wiœniewska
  54. From Micro to Macro via Production Networks By Vasco M. Carvalho; ; ;
  55. Are All Booms and Busts Created Equal? A New Methodology for Understanding Bull and Bear Stock Markets By German Forero-Laverde
  56. Pricing Assets in an Economy with Two Types of People By Roger E.A. Farmer
  57. Easier said than done? Reforming the prudential treatment of banks� sovereign exposures By Michele Lanotte; Giacomo Manzelli; Anna Maria Rinaldi; Marco Taboga; Pietro Tommasino
  58. Fiscal Consolidation, Public Debt and Output Dynamics in the Euro Area: lessons from a simple model with time-varying fiscal multipliers By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudré; Danielle Schweisguth; Xavier Timbeau
  59. Fiscal Cost of Quantitative Easing and Negative Interest Rate Policy by the Bank of Japan: Resolution method of a central bank with large negative equity (Japanese) By FUKAO Mitsuhiro
  60. An Economic and Stakeholder Analysis for the Design of IPP Contracts for Wind Farms By Sener Salci; Glenn P. Jenkins
  61. Monetary policy transmission: the case of Lithuania By Julius Stakenas; Rasa Stasiukynaite
  62. Understanding the Decline in the Safe Real Interest Rate By Robert E. Hall
  63. Malaysia; 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Malaysia By International Monetary Fund
  64. The Habit Habit By John H. Cochrane
  65. IMF Programs and Sensitivity to External Shocks: An Empirical Application By Mirela Sorina Miescu
  66. Financial Fragility and Over-the-Counter Markets By Sultanum, Bruno
  67. Nonlinearities and Parameter Instability in the Finance-Growth Nexus By Catherine Prettner
  68. Comparing different data descriptors in Indirect Inference tests on DSGE models By Minford, Patrick; Wickens, Michael; Xu, Yongdeng
  69. Convergence of Economic Growth and the Great Recession as Seen From a Celestial Observatory By Eamon Duede; Victor Zhorin
  70. Long Term Debt and Credit Crisis in a Liquidity Constrained Economy By Tiago Berriel; Rodrigo Abreu
  71. How Does the Sensitivity of Consumption to Income Vary Over Time? International Evidence By Islamaj, Ergys; Kose, Ayhan
  72. How does the sensitivity of consumption to income vary over time? International evidence By Ergys Islamaj; M. Ayhan Kose
  73. Estimation of Aggregate Demand and Supply Shocks Using Commodity Transaction Data By ABE Naohito; INAKURA Noriko; TONOGI Akiyuki
  74. Captial Accumulation and the Welfare Gains from Trade By Wyatt J. Brooks; Pau S. Pujolas

  1. By: Tayler, William (Lancaster University); Zilberman , Roy (Lancaster University)
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress.
    Keywords: Basel III — macroprudential policy; bank capital; monetary policy; borrowing cost channel; welfare
    JEL: E32 E44 E52 E58 G28
    Date: 2016–04–29
  2. By: Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand)
    Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
    JEL: E31 E32 E44 F41
    Date: 2016–04
  3. By: Miguel Leon-Ledesma; Alessio Moro
    Abstract: We use a two-sector model of structural transformation and balanced growth to show that the real interest rate, measured as the return on capital in units of GDP or in units of aggregate consumption, declines as income grows. This is due to the differential TFP growth in the goods producing sector relative to the services sector. This differential drives a relative price change that triggers a steady decline in the rate of return on capital along the growth path. We calibrate the model to U.S. data to reproduce the behavior of GDP, the share of services in consumption, the relative price goods/services and the investment/output ratio in the period 1950-2015. We find that the calibrated model displays a decline of the real interest rate of 36% in terms of units of GDP and of 43% in terms of units of aggregate consumption during the period considered.
    Keywords: Structural transformation; productivity of capital; two-sector model
    JEL: E22 E24 E31 O41
    Date: 2016–05
  4. By: Antoine Le Riche (University of Maine, Aix-Marseille University (Aix-Marseille School of Economics), GAINS, CNRS, GREQAM, EHESS & CAC); Francesco Magris (LEO, University "François Rabelais" of Tours and CAC); Antoine Parent (Sciences Po Lyon, LAET CNRS 5593)
    Abstract: We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.
    Keywords: Cash-in-Advance; Liquidity Trap; Monetary Policy; Multiple Equilibria.
    JEL: E31 E41 E43 E58
    Date: 2016–05–06
  5. By: Farley Grubb
    Abstract: The quantity theory of money is applied to the paper money regimes of seven of the nine British North American colonies south of New England. Individual colonies, and regional groupings of contiguous colonies treated as one monetary unit, are tested. Little to no statistical relationship, and little to no magnitude of influence, between the quantities of paper money in circulation and prices are found. The failure of the quantity theory of money to explain the value and performance of colonial paper money is a general and widespread result, and not an isolated and anomalous phenomenon.
    JEL: E31 E42 E51 N11
    Date: 2016–04
  6. By: Gary D. Hansen; Lee E. Ohanian
    Abstract: This chapter develops a toolkit of neoclassical macroeconomic models, and applies these models to the U.S. economy from 1929 through 2014. We first filter macroeconomic time series into business cycle and long-run components, and show that the long-run component is typically much larger than the business cycle component. We argue that this empirical feature is naturally addressed within neoclassical models with long-run changes in technologies and government policies. We construct two classes of models that we compare to raw data, and also to the filtered data: simple neoclassical models, which feature standard preferences and technologies, rational expectations, and a unique, Pareto-optimal equilibrium, and extended neoclassical models, which build in government policies and market imperfections. We focus on models with multiple sources of technological change, and models with distortions arising from regulatory, labor, and fiscal policies. The models account for much of the relatively stable postwar U.S. economy, and also for the Great Depression and World War II. The models presented in this chapter can be extended and applied more broadly to other settings. We close by identifying several avenues for future research in neoclassical macroeconomics.
    JEL: E13 E2 E6
    Date: 2016–03
  7. By: Gabriel Chodorow-Reich; Loukas Karabarbounis
    Abstract: By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We use our estimates to quantify the effects of the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point.
    JEL: E24 E62 J64 J65
    Date: 2016–04
  8. By: Tatiana Kirsanova; Charles Nolan; Maryam Shafiei Deh Abad
    Abstract: This paper studies the conditions under which a ‘modest’ financial shock can trigger a deep recession with a prolonged period of slow recovery. We suggest that two factors can generate such a profile. The first is that the economy has accumulated a moderately high level of private debt by the time the adverse shock occurs. The second factor is when monetary policy is restricted by the zero lower bound. When present, these factors can result in a sharp contraction in output followed by a slow recovery. Perhaps surprisingly, we use a standard DSGE model with financial frictions along the lines of Jermann and Quadrini (2012) to demonstrate this result and so do not need to rely on dysfunctional interbank markets.
    Keywords: financial frictions, credit boom, stagnation, ZLB
    JEL: E23 E32 E44 G01 G32
    Date: 2016–04
  9. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: Increasing the inflation target in a textbook New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short run co-movement between the nominal interest rate and inflation conditional on a nominal shock as Neo-Fisherianism. We show that the NK model is more likely to be Neo-Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo-Fisherianism is driven by the forward-looking nature of the model. Modifications which make the framework less forward-looking make it less likely for the model to exhibit Neo-Fisherianism. As an example, we show that a modest and empirically realistic fraction of "rule of thumb" price-setters may altogether eliminate Neo-Fisherianism in the textbook model.
    JEL: E31 E43 E52
    Date: 2016–04
  10. By: Max Raskin; David Yermack
    Abstract: Central banking in an age of digital currencies is a fast-developing topic in monetary economics. Algorithmic digital currencies such as bitcoin appear to be viable competitors to central bank fiat currency, and their presence in the marketplace may pressure central banks to pursue tighter monetary policy. More interestingly, the blockchain technology behind digital currencies has the potential to improve central banks’ payment and clearing operations, and possibly to serve as a platform from which central banks might launch their own digital currencies. A sovereign digital currency could have profound implications for the banking system, narrowing the relationship between citizens and central banks and removing the need for the public to keep deposits in fractional reserve commercial banks. Debates over the wisdom of these policies have led to a revival of interest in classical monetary economics.
    JEL: E42 E51 E52 E58 G21
    Date: 2016–05
  11. By: Alessandro Cianci (Department of Economics - Gabriele d'Annunzio University)
    Abstract: Lo studio muove dalla definizione di pareggio di bilancio pubblico in termini strutturali, previsto dal Fiscal Compact nell’ambito delle recenti regole fiscali europee. Tali regole subordinano l’obiettivo di bilancio di ogni Stato membro alla determinazione della componente ciclica del saldo di bilancio su cui gioca un ruolo di primaria importanza l’output gap (scostamento tra prodotto effettivo e potenziale) e, di conseguenza, le varie componenti e ipotesi che vanno a determinare il prodotto potenziale, in particolare il fattore lavoro. Lo studio analizza, quindi, il ruolo del tasso di disoccupazione che non genera spinte inflazionistiche (NAIRU, non-accelerating inflation rate of unemployment) nel contesto delle valutazioni di bilancio nel caso italiano, proponendone una stima derivante dai parametri di un modello macroeconometrico e confrontandola coi valori della Commissione Europea. Si verifica che i dati forniti dalla Commissione sovrastimano il NAIRU e, quindi, sottostimano il prodotto potenziale, lasciando minor “spazio fiscale” ad eventuali politiche anticicliche oppure obbligando il paese ad eccessive correzioni procicliche di bilancio.
    Keywords: NAIRU, output gap, potential output, unemployment, European policy rules, cyclically adjusted budget.
    JEL: C1 E31 E32 E62 H62 J20
    Date: 2016–04
  12. By: Sami Alpanda; Alexander Ueberfeldt
    Abstract: Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the level of household debt. This crisis regime is characterized by an elevated risk premium on mortgage lending rates, and, occasionally, a binding zero lower bound on the policy rate, imposing large costs on the economy. Using our set-up, we examine the optimal level of monetary leaning, introduced as a Taylor rule response coefficient on the household debt gap. We find that the costs of leaning in regular times outweigh the benefits of a lower crisis probability. Although the decline in the crisis probability reduces volatility in the economy, this is achieved by lowering the average level of debt, which severely hurts borrowers and leads to a decline in overall welfare.
    Keywords: Economic models, Financial stability, Housing, Monetary policy framework
    JEL: E44 E52 G01
    Date: 2016
  13. By: Ulrich Heilemann (Universität Leipzig); Susanne Schnorr-Bäcker (Statistisches Bundesamt)
    Abstract: Given that the Great Recession in Germany was neither predicted nor identified at the time, this paper examines whether data available could have helped to predict or identify the crisis in real time. We inspect forecasts published during April–December 2008 by 12 major institutions, for available data: real-time data from official statistics for Germany and the European Union, major surveys, and indicators. Although annual real GDP forecasts for 2008 were rather accurate, forecasters failed to observe the onset of the recession in Q2 2008, though from May onward, an increasing amount of data—neither ambiguous nor misleading—indicated that the economy was in recession or would likely enter one soon. Nevertheless, forecasters recognised the recession only in mid-November, when the country was already seven months into the recession, thereby confirming forecasters’ ‘low priors about the likelihood of a recession’.
    Keywords: Forecast accuracy; Great Recession; real-time analysis; data processing
    JEL: C53 E32 E37
    Date: 2016–02
  14. By: Saki Bigio; Jennifer La’O
    Abstract: We study how an economy’s production structure determines the response of aggregate output and employment to sectoral financial shocks. In our framework, economic production is organized in an input-output network in which firms face financial constraints on their working capital. We show how sectoral financial shocks propagate through the network and manifest at the aggregate level through two channels: a fall in total factor productivity and an aggregate labor wedge distortion. The strength of each channel depends on the overall network architecture and the location of shocks. Finally, we calibrate our model to the U.S. input-output tables and use it to quantitatively assess the role of the network multiplier within the context of the recent Financial Crisis and the Great Recession.
    JEL: C67 E32 E42 G01 G10
    Date: 2016–04
  15. By: Bajan Bartlomiej (Poznan University of Life Sciences)
    Abstract: In the chapter attempts have been taken to assess the potential impact of Polish accession to the euro zone. The analysis covers costs and benefits of monetary integration which are mostly pointed in literature, alluding to the experience of European Union countries. The analysis covers the years 1996-2004. A comparison was made between countries which have adopted the euro in 1999, and those that remained with the national currencies. There are differences between these two groups of countries in increments of GDP per capita, since the introduction of the euro in paper form, despite an earlier convergence of this indicator, however much smaller differences occurred in the case of the inflation rate. Both groups of countries have recorded a significant increase in foreign trade turnover since the inception of the euro area. The data used in the analysis come from the European Statistical Office (Eurostat) and the United Nations Conference on Trade and Development (UNCTAD).
    Keywords: monetary union; euro zone
    JEL: E02 E52 E59 F45
    Date: 2016–05
  16. By: Greg Kaplan; Kurt Mitman; Giovanni L. Violante
    Abstract: In an influential paper, Mian, Rao and Sufi (2013) exploit geographic variation in housing supply elasticities to measure the effect of changes in the housing share of net worth on total household expenditures during the Great Recession. Their widely-cited estimates are based on proprietary house price data, and use new vehicle registrations as the main proxy for total spending. We revisit their study using different, publicly available data on house prices, and an easily-accessible proxy for expenditures in non-durable goods. We re-affirm their findings in our data, and refine their analysis in several dimensions: (i) we separate the roles of falling house prices and initial leverage; (ii) we distinguish the effects on real consumption versus nominal expenditures; and (iii) we infer the implied elasticity of total non-durable expenditures in goods and services to housing net worth.
    JEL: E21 E32
    Date: 2016–05
  17. By: Roberto Tamborini (University of Trento); Francesco Saraceno (OFCE Sciences Po & LUISS-SEP, Rome)
    Abstract: How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as the aggregate of two countries characterised by New Keynesian output and inflation equations with a Tobinian money market equation that determines each country's interest rate as a spread above the common policy rate. High spreads determine negative output gaps and deflationary pressure. With the ECB policy rate at the zero lower bound, QE expands money supply throughout the EZ. We show that QE, if large enough, can indeed be effective by reducing country spreads and the ensuing output gaps. However, zero output and deflation gaps can be obtained for the EZ on average, but not for all single countries unless fully symmetric conditions are met. Therefore fiscal accommodation at the country level should also intervene, and we conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: monetary policy, ECB, deflation, Zero-lower-bound, Fiscal policy
    JEL: E3 E4 E5
    Date: 2016–05
  18. By: Roberto Tamborini; Francesco Saraceno (OFCE)
    Abstract: How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as the aggregate of two countries characterised by New Keynesian output and inflation equations with a Tobinian money market equation that determines each country's interest rate as a spread above the common policy rate. High spreads determine negative output gaps and deflationary pressure. With the ECB policy rate at the zero lower bound, QE expands money supply throughout the EZ. We show that QE, if large enough, can indeed be effective by reducing country spreads and the ensuing output gaps. However, zero output and deflation gaps can be obtained for the EZ on average, but not for all single countries unless fully symmetric conditions are met. Therefore fiscal accommodation at the country level should also intervene, and we conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary policy; European Central Bank; Deflation; Zero-lower-Bound; Fiscal Policy
    JEL: E3 E4 E5
    Date: 2016–05
  19. By: Nalewaik, Jeremy J.
    Abstract: This paper examines two candidate hypotheses explaining the stabilization of U.S. inflation since the 1970s and 1980s. The first explanation credits the stabilization of inflation expectations, and assumes those expectations have a strong positive causal effect on actual subsequent inflation, while the second explanation credits the disappearance of such a strong positive causal effect. The paper reports statistical tests favorable to both a stabilization of inflation expectations and a marked decline in the effect of the general public’s inflation expectations on subsequent inflation.
    Keywords: Inflation ; Phillips Curve
    JEL: E31 E52
    Date: 2016–04–21
  20. By: Robert E. Hall
    Abstract: In modern economies, sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output. This chapter investigates the processes that account for these persistent slumps. The data are from the economy of the United States, and the discussion emphasizes the financial crisis of 2008 and the ensuing slump. The framework starts by discerning driving forces set in motion by the initial shock. These are higher discounts applied by decision makers (possibly related to a loss of confidence), withdrawal of potential workers from the labor market, diminished productivity growth, higher markups in product markets, and spending declines resulting from tighter lending standards at financial institutions. The next step is to study how driving forces influence general equilibrium, both at the time of the initial shock and later as its effects persist. Some of the effects propagate the effects of the shock---they contribute to poor performance even after the driving force itself has subsided. Depletion of the capital stock is the most important of these propagation mechanisms. I use a medium-frequency dynamic equilibrium model to gain some notions of the magnitudes of responses and propagation.
    JEL: E24 E32 J21
    Date: 2016–05
  21. By: Johnson, Christopher
    Abstract: Liquidity considerations are important in understanding the relationship between asset prices and monetary policy. Differences of opinion regarding the future value of an asset can affect liquidity of not only the underlying asset, but also of competing media of exchange, such as money. I consider a monetary search framework in which money and risky assets can facilitate trade, but where the asset is an opinion-sensitive medium of exchange in that traders may disagree on its future price. A pecking-order theory of payments is established between money and risky assets, which can go in either direction depending on the respective beliefs of both agents in a bilateral trade. In short, optimists prefer to use money over assets, whereas pessimists prefer to use assets over money. In contrast to a majority of the differences of opinion literature, not only do pessimists actively participate in the purchasing of assets, but in some cases their demand coincides with that of optimists. Additionally, in support of Bernanke and Gertler (2000), I find that monetary policy aimed at reducing asset price volatility need not be welfare-maximizing. Instead, the Friedman rule is welfare-maximizing.
    Keywords: liquidity, monetary policy, asset pricing, differences of opinion
    JEL: E4 E5
    Date: 2016–04–13
  22. By: Roger E.A. Farmer; Konstantin Platonov
    Abstract: We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.
    JEL: E12 E3 E4
    Date: 2016–03
  23. By: Santiago Gamba Santamaría; Eliana Rocío González Molano (Banco de la República de Colombia); Luis Fernando Melo Velandia (Banco de la República de Colombia)
    Abstract: En este estudio se determina si las expectativas de inflación en Colombia están ancladas a partir de una metodología que permite simultáneamente estimar el ancla de las expectativas y la fuerza de anclaje. Esta técnica propone expresar las expectativas como un promedio ponderado entre el ancla, no observable, y la inflación observada al momento de generar los pronósticos. La ponderación correspondiente al ancla está dada por una función del horizonte de pronóstico y se puede asociar con la fuerza de anclaje. Los datos utilizados corresponden a un panel de expectativas para diciembre de cada año entre 2002 y 2017 con horizonte de 0 a 24 meses, provenientes de la fuente Consensus Economics. Los resultados indican que el ancla de las expectativas de inflación ha disminuido a través del tiempo, siguiendo la tendencia de la meta anual de inflación fijada por el Banco Central y acercándose a la meta de inflación de largo plazo. Por otro lado, se encuentra que la fuerza de anclaje varía en el tiempo. En particular, en la parte final de muestra, ésta presenta una disminución; sin embargo, para horizontes alrededor de dos años la ponderación del ancla en la formación de expectativas se mantiene cerca a uno. Classification JEL: C50, E31, E58
    Keywords: Anclaje de expectativas, expectativas de inflación, panel de pronósticos
    Date: 2016–05
  24. By: E. Monnet; D. Puy
    Abstract: This paper assesses the strength of business cycle synchronization between 1950 and 2014 in a sample of 21 countries using a new quarterly dataset based on IMF archival data. Contrary to the common wisdom, we find that the globalization period is not associated with more output synchronization at the global level. The world business cycle was as strong during Bretton Woods (1950-1971) than during the Globalization period (1984-2006). Although globalization did not affect the average level of co-movement, trade and financial integration strongly affect the way countries co-move with the rest of the world. We find that financial integration de-synchronizes national outputs from the world cycle, although the magnitude of this effect depends crucially on the type of shocks hitting the world economy. This de-synchronizing effect has offset the synchronizing impact of other forces, such as increased trade integration
    Keywords: International Business Cycles, Synchronization, Financial integration, Trade integration, Globalization.
    JEL: E32 F41 F42
    Date: 2016
  25. By: Anson T. Y. Ho; Jie Zhou
    Abstract: Assets in tax-deferred retirement accounts (TDA) and housing are two major components of household portfolios. In this paper, we develop a life-cycle model to examine the interaction between households’ use of TDA and their housing decisions. The model generates life-cycle patterns of home ownership and the composition of net worth that are broadly consistent with the data from the Survey of Consumer Finances. We find that TDA promotes home ownership, as households take advantage of the preferential tax treatments for both TDA and home ownership. They substitute TDA assets for home equity by accumulating wealth in TDA and making smaller down payments (taking out bigger mortgages); consequently, they become homeowners earlier in their lives. On the other hand, housing-related policies, such as a minimum down payment requirement and mortgage interest deductibility, affect households’ housing decisions more than their use of TDA.
    Keywords: Economic models, Housing
    JEL: C61 D14 D91 E21 H24 R21
    Date: 2016
  26. By: Halina Kowalczyk; Ewa Stanisławska
    Abstract: We assess similarity of the Polish central bank’s forecasts published in Inflation Reports and economic experts’ forecasts (from NBP Survey of Professional Forecasters), an important issue in monetary policy. Contrary to other studies which use point forecasts, we are interested is comparing whole forecasts’ distributions. We are especially interested whether the SPF experts mirror the NBP projections. For this purpose, we propose employing methods based on distance between distributions. Unfortunately, substantial heterogeneity of forecasts, as well as short and atypical period analyzed, limit drawing firm conclusions with this respect.
    Keywords: survey data, fan charts, probabilistic forecasts, inflation forecasts, GDP growth forecasts, distribution similarity
    JEL: D83 D84 E37
    Date: 2016
  27. By: Gustavo A. Del Angel
    Abstract: This essay analyzes the trends in payments in Mexico since 2002 and argues that there has been an important growth in the use of cashless digital payment instruments, namely the use of credit and debit cards, electronic funds transfers (EFTs) and mobile banking. However, the use of cash widely persists in the Mexican economy. The essay discusses the factors behind the persistence of the use of cash, and argues that low financial inclusion and informal economic activity are considered the main causes. Equally relevant is the fact that digital instruments are not a perfect substitute for cash as money yet, as it is the need to adequate payments services to the convenience and trust of segments of users, mainly population that still has little use or no access to financial services.
    JEL: E42 G20 G21 O32 E49
    Date: 2016–05
  28. By: Wickens, Michael R.
    Abstract: The EU Commission's Five Presidents' Report proposes new rules for the eurozone covering fiscal policy, banking and financial markets designed to avert another eurozone crisis. This paper examines the causes of the current eurozone crisis and discusses whether the Report's proposals are likely to succeed. It is argued that the main causes of the crisis were EMU and the failure of financial markets to price risk correctly. It is claimed that the Report may not solve these problems. Having already lost their monetary policy instrument, the Report's fiscal proposals would remove their fiscal policy instrument too and deprive countries of the means of economic stabilisation. The proposals would also transfer to an undemocratic and unaccountable Commission important national competences.
    Keywords: eurozone crisis; financial markets; Fiscal policy; Monetary policy; pricing risk
    JEL: E52 E61 E63
    Date: 2016–04
  29. By: Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott
    Abstract: Research in international trade has changed dramatically over the last twenty years, as attention has shifted from countries and industries towards the firms actually engaged in international trade. The now standard heterogeneous firm model posits a continuum of firms that compete under monopolistic competition (and hence are measure zero) and decide whether to export to foreign markets. However, much of international trade is dominated by a few “global firms,” which participate in the international economy along multiple margins and are large relative to the markets in which they operate. We outline a framework that allows firms to be of positive measure and to decide simultaneously on the set of production locations, export markets, input sources, products to export, and inputs to import. We use this framework to interpret features of U.S. firm and trade transactions data and highlight interdependencies across these margins of firm international participation. Global firms participate more intensively along each margin, magnifying the impact of underlying differences in firm characteristics, and explaining their dominance of aggregate international trade.
    Keywords: firm heterogeneity; international trade; multinationals; multi-product firms
    JEL: E21 E24 F53 O32 O47
    Date: 2016–04
  30. By: Warren Mosler; Damiano B. Silipo
    Abstract: In this paper we analyze options for the European Central Bank (ECB) to achieve its single mandate of price stability. Viable options for price stability are described, analyzed, and tabulated with regard to both short- and long-term stability and volatility. We introduce an additional tool for promoting price stability and conclude that public purpose is best served by the selection of an alternative buffer stock policy that is directly managed by the ECB.
    Keywords: European Central Bank; Monetary Policy Tools and Price Stability; Buffer Stock Policy
    JEL: E52 E58
    Date: 2016–04
  31. By: Doepke, Matthias (Northwestern University); Tertilt, Michèle (University of Mannheim)
    Abstract: Much of macroeconomics is concerned with the allocation of physical capital, human capital, and labor over time and across people. The decisions on savings, education, and labor supply that generate these variables are made within families. Yet the family (and decision-making in families) is typically ignored in macroeconomic models. In this chapter, we argue that family economics should be an integral part of macroeconomics, and that accounting for the family leads to new answers to classic macro questions. Our discussion is organized around three themes. We start by focusing on short and medium run fluctuations, and argue that changes in family structure in recent decades have important repercussions for the determination of aggregate labor supply and savings. Next, we turn to economic growth, and describe how accounting for families is central for understanding differences between rich and poor countries and for the determinants of long-run development. We conclude with an analysis of the role of the family as a driver of political and institutional change.
    Keywords: family economics, macroeconomics, business cycles, growth
    JEL: E20 E30 J10 J20 O40
    Date: 2016–03
  32. By: Farooq Akram (Norges Bank (Central Bank of Norway)); Andrew Binning (Norges Bank (Central Bank of Norway)); Junior Maih (BI Norwegian Business School)
    Abstract: In this paper we address the issue of assessing and communicating the joint probabilities implied by density forecasts from multivariate time series models. We focus our attention in three areas. First, we investigate a new method of producing fan charts that better communicates the uncertainty present in forecasts from multivariate time series models. Second, we suggest a new measure for assessing the plausibility of non-central point forecasts. And third, we describe how to use the density forecasts from a multivariate time series model to assess the probability of a set of future events occurring. An additional novelty of this paper is our use of a regime-switching DSGE model with an occasionally binding zero lower bound constraint, estimated on US data, to produce the density forecasts. The tools we off er will allow practitioners to better assess and communicate joint forecast probabilities, a criticism that has been leveled at central bank communications.
    Keywords: Monetary Policy, Fancharts, DSGE, Zero Lower Bound, Regime-switching, Bayesian Estimation
    JEL: C6 C11 C53 E1 E5 E37
    Date: 2016–04–28
  33. By: Stefan Eichler; T. Lähner; Felix Noth
    Abstract: This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts’ regional banking sector instability into account when they vote. Considering the period from 1978 to 2010, we find that a deterioration in a district’s bank health increases the probability that this district’s representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector.
    Keywords: FOMC voting, regional banking sector instability, lobbying
    JEL: E43 E52 E58 G21
    Date: 2016–05
  34. By: Marco Cozzi (University of Victoria); Giulio Fella (Queen Mary University of London)
    Abstract: This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that, in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved numerically and calibrated to the US economy. In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable.
    Keywords: Severance payments, Incomplete markets, Welfare
    JEL: E24 D52 D58 J65
    Date: 2016–05
  35. By: Dóra Siklós (European Stability Mechanism)
    Abstract: The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending
    Keywords: FX lending, capital adequacy, bank regulation, counterfactual analysis
    JEL: E58 G01 G21 G28
    Date: 2016–04
  36. By: Kamil Pastor (Warsaw School of Economics)
    Abstract: In this article, the idea of financial cycles will be explained as well as its impact on economy. Price bubble and financial accelerator play key role in financial cycle. If there exist disparities in finance markets and they are not stabilized, the future crisis may be more severe. The role of central banks, governments and surveillance institutions is to conducting adequate policy, aiming at maintaining financial stability not only in short but also in medium term.
    Keywords: financial cycles; financial accelerator; macroprudential policy
    JEL: G15 G18 O43
    Date: 2016–05
  37. By: Felix Reichling; Shinichi Nishiyama
    Abstract: This working paper analyzes five stylized changes in federal fiscal policy that would close a fiscal gap of 1.8 percent of GDP, and measures the costs that those policy changes would impose on different generations.
    JEL: E62 E63 H60
    Date: 2015–12–17
  38. By: Asongu, Simplice; Tchamyou, Vanessa
    Abstract: The study assesses the role of globalization-fuelled regionalization policies on financial allocation efficiency in four economic and monetary regions in Africa for the period 1980 to 2008. Banking system and financial system efficiencies are used as dependent variables whereas seven bundled and unbundled globalization variables are employed as independent indicators. The bundling exercise is achieved by means of principal component analysis while the empirical evidence is based on interactive Fixed Effects regressions. The following findings are established. First, financial allocation efficiency is more sensitive to financial openness compared to trade openness and most sensitive to globalization. The relationship between allocation efficiency and globalization-fuelled regionalization policies is: (i) Kuznets or inverted U-shape in the UEMOA and CEMAC zones (evidence of decreasing returns to allocation efficiency from globalization-fuelled regionalization) and (ii) U-shape overwhelmingly in the COMESA and scantily in the EAC (increasing returns to allocation efficiency from globalization-fuelled regionalization). Established shapes are relevant to specific globalization dynamics within regions. ‘Economic and monetary’ regions are more prone to surplus liquidity than purely economic regions. Policy implications and measures of fighting surplus liquidity are discussed.
    Keywords: Globalization; Financial Development; Regional Integration; Panel; Africa
    JEL: D60 E40 I10 O10 P50
    Date: 2015–12
  39. By: Matheus Grasselli (Department of Mathematics and Statistics, McMaster University, Hamilton, Canada, Fields Institute for Research In Mathematical Sciences - Fields Institute for Research In Mathematical Sciences); Adrien Nguyen Huu (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - UPE - Université Paris-Est)
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Keywords: limit cycles,local stability,Minsky's financial instability hypothesis,Keen model,stock-flow consistency,financial crisis,dynamical systems in macroeconomics
    Date: 2015–07–06
  40. By: John B. Taylor (Department of Economics, Stanford University); Volker Wieland
    Abstract: Recently there has been an explosion of research on whether the equilibrium real interest rate has declined, an issue with significant implications for monetary policy. A common finding is that the rate has declined. In this paper we provide evidence that contradicts this finding. We show that the perceived decline may well be due to shifts in regulatory policy and monetary policy that have been omitted from the research. In developing the monetary policy implications, it is promising that much of the research approaches the policy problem through the framework of monetary policy rules, as uncertainty in the equilibrium real rate is not a reason to abandon rules in favor of discretion. But the results are still inconclusive and too uncertain to incorporate into policy rules in the ways that have been suggested.
    Date: 2016–04
  41. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone.
    JEL: E52 F38 F41
    Date: 2016–05
  42. By: Kaplan, Robert Steven (Federal Reserve Bank of Dallas)
    Abstract: Remarks at the Official Monetary Policy and Financial Institutions Forum, London, April 29, 2016.
    Date: 2016–04–29
  43. By: Klaus Weyerstraß
    Abstract: Im vorliegenden Beitrag wird die Entwicklung der Arbeitsproduktivität in Österreich im europäischen Vergleich analysiert. Es zeigt sich, dass die gesamtwirtschaftliche Produktion je Erwerbstätigen im Zeitraum 2000 bis 2015 in Österreich hinter dem EU- und Euroraum-Durchschnitt zurückgeblieben ist. Auch in Deutschland und der Schweiz stieg die Arbeitsproduktivität je Erwerbstätigen in diesem Zeitraum stärker als in Österreich. Anders ist das Bild, wenn die Produktivität je Arbeitsstunde betrachtet ist. Hier liegt Österreich über dem europäischen Durchschnitt und auch vor Deutschland und der Schweiz. Dies ist aber darauf zurückzuführen, dass die Zahl der geleisteten Ar-beitsstunden in Österreich stärker als in anderen Ländern gesunken ist, wodurch die Kostenbelastung je Stunde steigt. Ein wesentlicher Bestimmungsfaktor der Arbeitsproduktivität ist die totale Faktorproduktivität (TFP), die wiederum als wichtiger Indikator für den technischen Fortschritt einer Volkswirtschaft gilt. Beim Wachstum der TFP ist Österreich in letzter Zeit deutlich hinter den EU-Durchschnitt und hinter Deutschland und die Schweiz zurückgefallen, was Reformbedarf zur Steigerung der Innovationskraft signalisiert. Niedriges Produktivitätswachstum resultiert in überdurchschnittlich steigenden Lohnstückkosten. Bildung, Forschung und Innovation sowie ein funktionierender Wettbewerb sind wichtige Faktoren zur Förderung des Produktivitätsfortschritts.
    Keywords: Arbeitsproduktivität, Totale Faktorproduktivität, Österreich
    JEL: E24 O47
    Date: 2016–04
  44. By: Daniel Baumgarten (Department of Economics, Ludwig-Maximilian University Munich); Michael Kvasnica (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We investigate with German data how the use of temporary agency work has helped establishments to manage the economic and financial crisis in 2008/09. We examine the (regular) workforce development, use of short-time work, and business performance of establishments that made differential use of temporary agency work prior to the crisis. Overall, our results suggest that establishments with a greater use of temporary agency work coped better with the sharp decline in demand and made less frequent use of government-sponsored short-time work schemes.
    Keywords: labour demand, employment adjustment, economic crisis, temporary agency work, short-time work, establishment data
    JEL: E32 J23 L23 J68
    Date: 2016–03
  45. By: Martin M. Andreasen (Aarhus University and CREATES); Kasper Jørgensen (Aarhus University and CREATES)
    Abstract: This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate puzzle with a low IES of 0:07 and a low RRA of 5.
    Keywords: Bond premium puzzle, Equity premium puzzle, Long-run risk, Perturbation Approximation, Risk-free rate puzzle.
    JEL: E44 G12
    Date: 2016–05–09
  46. By: Ahmad, Khalil; Ali, Amjad
    Abstract: Specific amount of food and safe drinking water are basic necessities of living human-beings. The human population of the universe is touching its highest level and counted more than seven billion, it is going towards facing a great famine as predicated by Malthus (1798) . The positive and preventive checks of Malthus (1798) can be observed empirically in different parts of the world (Swaminathan and Feng 1994). The study has tested the population theory of Malthus in case of Pakistan. For investigating the long run relationship among the variables of the model Johanson cointegration technique is applied. For examining the short run dynamic Error Correction Model (ECM) is applied. The results of the study of the study supported that the Malthusian theory about the population and income growth in the case of Pakistan. Furthermore, higher population growth rate increases the food insecurity not only in long run but also in short run in case of Pakistan.
    Keywords: population growth, food insecurity, gross domestic product, consumer price index
    JEL: E01 E31 Q18 Q56
    Date: 2016–01
  47. By: Acikgoz, Omer
    Abstract: I prove existence of stationary recursive competitive equilibrium in Bewley economies with production under specifications in which (i) utility function is allowed to be unbounded, and (ii) the underlying discrete idiosyncratic productivity process can take any form, aside from mild restrictions. Some of the intermediate results provide theoretical basis for assumptions often made in the quantitative macroeconomics literature. By providing an example, I illustrate that equilibrium is not necessarily unique, even under typical specifications of the model, and discuss the underlying reasons for multiplicity.
    Keywords: Recursive Competitive Equilibrium, Bewley/Huggett/Aiyagari model, Existence, Uniqueness
    JEL: C62 E00 E21
    Date: 2015–12–30
  48. By: Shin, Minchul; Zhong, Molin
    Abstract: This paper proposes a multivariate stochastic volatility-in-vector autoregression model called the conditional autoregressive inverse Wishart-in-VAR (CAIW-in-VAR) model as a framework for studying the real effects of uncertainty shocks. We make three contributions to the literature. First, the uncertainty shocks we analyze are estimated directly from macroeconomic data so they are associated with changes in the volatility of the shocks hitting the macroeconomy. Second, we advance a new approach to identify uncertainty shocks by placing limited economic restrictions on the first and second moment responses to these shocks. Third, we consider an extension of the sign restrictions methodology of Uhlig (2005) to uncertainty shocks. To illustrate our methods, we ask what is the role of financial markets in transmitting uncertainty shocks to the real economy? We find evidence that an increase in uncertainty leads to a decline in industrial production only if associated with a deterioration in financial conditions.
    Keywords: Multivariate stochastic volatility ; Uncertainty ; Vector autoregression ; Volatility-in-mean ; Wishart process
    JEL: C11 C32 E32
    Date: 2016–04–25
  49. By: Marco Botta; Luca Colombo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We investigate the capital structure of a large sample of corporations in 52 countries, focusing on the effects of macroeconomic and institutional characteristics on firms' dynamic behavior. We find that these characteristics affect both the optimal level of leverage and the adjustment process towards it. The speed of adjustment varies significantly with both macroeconomic and institutional conditions for financially unconstrained firms, while it is unaffected for constrained firms. Overall, our results support a complex view of capital structure decisions, where market timing and pecking order arguments affect the short-run, while dynamic trade-off with costly readjustment matters in the long-run.
    Keywords: Capital Structure Dynamics, Debt Readjustments, Dynamic Adjustment Models, Macroeconomic Conditions, Speed of Adjustment.
    JEL: C23 E44 G32
    Date: 2016–04
  50. By: Aron, Janine; Muellbauer, John
    Abstract: In the absence of micro-data in the public domain, new aggregate models for the UK's mortgage repossessions and arrears are estimated using quarterly data over 1983-2014, motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies. An innovation to improve on the flawed but widespread use of loan-to-value measures, is to estimate difficult-to-observe variations in loan quality and access to refinancing, and shifts in lenders' forbearance policy, by common latent variables in a system of equations for arrears and repossessions. We introduce, for the first time in the literature, a theory-justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears. This is based on an average debt-equity ratio, corrected for regional deviations, and uses a functional form for the distribution of the debt-equity ratio checked on Irish micro-data from the Bank of Ireland, and Bank of England snapshots of negative equity. We systematically address serious measurement bias in the 'months-in-arrears' measures, neglected in previous UK studies. Highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt-service ratio, the proportion of mortgages in negative equity and the unemployment rate. Economic forecast scenarios to 2020 highlight risks faced by the UK and its mortgage lenders, illustrating the usefulness of the approach for bank stress-testing. For macroeconomics, our model traces an important part of the financial accelerator: the feedback from the housing market to bad loans and hence banks' ability to extend credit.
    Keywords: credit risk stress testing; foreclosures; latent variables model; mortgage arrears; mortgage payment delinquencies; mortgage repossessions
    JEL: C51 C53 E27 G17 G21 G28 R21 R28
    Date: 2016–04
  51. By: Bitros, George C.; Flytzanis, Elias
    Abstract: We show that the “abandonment” model emphasized by researchers in capital budgeting and the “steady state” replacement model emphasized by economic theorists constitute sub-cases of a more general class of transitory replacement models in which the horizon of reinvestments is determined endogenously along with the other decision variables. Moreover, comparisons between our model and that of steady state replacement revealed that there are considerable differences. In particular, we found that: i) the two models lead to different estimates concerning the profit horizon, the duration of replacements, the timing of abandonment or scrapping, and the impact of productive capacity and market structure on service lives, as these are determined by various parameters, ii) even though the steady state replacement policy may result in higher total profit, it does so at great expense in flexibility for the planner, because the replacements are built into the model from the beginning, and iii) the transitory replacement policy seems more realistic in that the replacements are undertaken only if forced on the planner by decreasing profits.
    Keywords: optimal service life, replacement, abandonment, scrapping, horizon of reinvestments
    JEL: E22
    Date: 2016–03–15
  52. By: Christina Christou (University of Pireaus, Department of Banking & Financial Management, Greece); Juncal Cunado (University of Navarra, School of Economics, Spain); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study examines the convergence patterns of prices across 50 U.S. states over the period 1960-2007, by applying the convergence algorithm developed by Phillips and Sul (2007). The empirical findings suggest rejection of full convergence across the 50 U.S. states prices, and the presence of a certain number of convergence clubs. In particular, eleven subgroup convergence clubs emerge, suggesting that great differences in prices indices exist across the U.S. states. The main implications of the paper point out to the low degree of market integration across the U.S. states, to the limitations of using a unique national price deflator to calculate real US state variables, and to the different effects that the national monetary policies directed to stabilize national prices, for example, will have on U.S. state prices.
    Keywords: Price converge, Club convergence, U.S. states
    JEL: C33 E31 R10
    Date: 2016–04
  53. By: Anna Wiœniewska (Nicolaus Copernicus University)
    Abstract: The aim of this article is to present altcoins that seem to be most promising. The author has made an attempt at answering the questions about the reasons for their creation and if any of them is strong enough to undermine Bitcoin's position among virtual currencies. In order to find the answers there have been used the literature on the subject as well as available internet sources since the Internet is the environment in which cryptocurrencies and their makers function. The research demonstrates that among over 600 existing cryptocurrencies there exists a group of quite interesting projects. These projects has not always been targeted at creation of a new cryptocurrency: some of them have been aimed at implementing the technology used by Bitcoin in other spheres of human activity, e.g. to collect data. There have been presented three Polish cryptocurrencies, whose history shows how uncertain it is to achieve success at the market of virtual currencies even if a created cryptocurrency is believed to be well-prepared to debut. The more we get to know about the way in which altcoins function, the more we will be able to predict if it is just a passing fad or the beginning of the new age of online payments.
    Keywords: cryptocurrencies; polish cryptocurrencies; ethereum, litecoin
    JEL: E42 E49 E51
    Date: 2016–05
  54. By: Vasco M. Carvalho; ; ;
    Abstract: A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perpective on production linkages can offer novel insights on the sources of aggregate fluctuations. To do this, I show (i) how production networks can be mapped to a standard general equilibrium setup; (ii) how to approach input-output from this networked perspective and (iii) how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.
    Keywords: Production Networks; Comovement; Business Cycles; Input-Output Linkages.
    Date: 2014–10–17
  55. By: German Forero-Laverde (Universitat de Barcelona)
    Abstract: This paper presents a new non-parametric methodology for the description of the evolution of the asset cycle in the stock market. It uses the empirical distribution of the data; in particular the structures of the tails of return distributions to build Boom-Bust Indicators (BBI) that describe whether a given market is a bull or a bear. These indicators, for three different time horizons, perform better than the usual binary sequence of financial crises because they measure both direction and intensity, they have stronger variability than a binary variable, they are strongly associated to the original data and keep some of its underlying characteristics such as serial autocorrelation, and they identify at least the same bull and bear markets as other methodologies. There is no evidence that favors one of the BBI specifications above the others.
    Keywords: Financial cycle, bull and bear markets, Stock market, Financial crises, Non-parametric models, Stock market history, Economic History.
    JEL: C14 E32 E44 G01 N2
    Date: 2016
  56. By: Roger E.A. Farmer
    Abstract: This paper constructs a general equilibrium model with two types of people where asset price fluctuations are caused by random shocks to the price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption and financial assets across types. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset prices.
    JEL: E0 G12
    Date: 2016–05
  57. By: Michele Lanotte (Bank of Italy); Giacomo Manzelli (Bank of Italy); Anna Maria Rinaldi (Bank of Italy); Marco Taboga (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: In the aftermath of the euro-area sovereign debt crisis, several commentators have questioned the favourable treatment of banks� sovereign exposures allowed by the current prudential rules. In this paper, we assess the overall desirability of reforming these rules. We conclude that the microeconomic and macroeconomic costs of a reform could be sizeable, while the benefits are uncertain. Furthermore, we highlight considerable implementation issues. Specifically, it is widely agreed that credit ratings of sovereigns issued by rating agencies present important drawbacks, but sound alternatives still need to be found; we argue that consideration could be given to the use of quantitative indicators of fiscal sustainability, similar to those provided by international bodies such as the IMF or the European Commission.
    Keywords: sovereign risk, prudential regulation, sustainability of public finances
    JEL: E58 G21 G28 H63
    Date: 2016–04
  58. By: Christophe Blot (OFCE); Marion Cochard (Banque de France); Jérôme Creel (OFCE); Bruno Ducoudré (OFCE (OFCE)); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE)
    Abstract: EMU countries have engaged in fiscal consolidation since 2011. This paper deals with the public debt and output dynamic consequences of this strategy. To this end, we develop a simple macroeconomic model of the Euro area, where fiscal multiplier is time-varying. Recent empirical evidence has indeed shown that fiscal multipliers were higher in time of crisis. We then analyze the ability of EMU countries to comply with the new fiscal rules on public debt. The path of public debt and output gap is simulated according to different hypotheses related to fiscal multiplier, monetary policy and hysteresis effects. Not all EMU countries would be able to reach a 60 % debt-to-GDP ratio in 2032. An alternative strategy may be to spread austerity in order to report part of consolidation to periods where the fiscal multiplier will be weaker. The gain of spreading austerity may yet be partly offset by higher risk premium. There is then a need to find institutional arrangements to avoid panics in the sovereign debt markets. Finally, it is shown that it would not be very efficient to implement an expansionary fiscal policy in Germany in order to balance austerity in the Euro area. Since output gap is nearly closed in Germany, the multiplier effect of a positive fiscal stance would be low and spillover effects would not be significant.
    Keywords: Fiscal consolidation; Fiscal multiplier; Public debt; Macroeconomic Performance
    Date: 2014–11
  59. By: FUKAO Mitsuhiro
    Abstract: The Bank of Japan (BOJ)'s quantitative and qualitative easing of the monetary policy appears costless on the surface. However, in the long run, the BOJ is likely to incur huge fiscal cost. Since the BOJ is buying a massive amount of long-term Japanese government bonds (JGBs), it will face a large loss from the falling JGB prices once Japan exits from a deflationary environment. The BOJ's negative interest policy in February 2016 will reduce the interest payment on a part of the reserves held by private financial institutions. However, this will be more than offset by the cost from the open market purchase of long-term JGBs with negative yield. In this paper, we will estimate the fiscal cost of the quantitative easing policy. We also discuss the resolution methods of the central bank with permanent negative cash flow.
    Date: 2016–03
  60. By: Sener Salci (Department of Economics, Queen’s University, Kingston ON, Canada and University of Birmingham, Birmingham, UK); Glenn P. Jenkins (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)
    Abstract: In this paper we introduce a method for quantifying the benefits and costs of implementing a grid-connected onshore wind project that is owned and operated by an independent power producer (IPP). The proposed policy analysis tool is applied to the appraisal of a wind farm in Santiago Island, Cape Verde. The policy analysis is conducted from the perspectives of the electric utility, the country’s economy, the government and the private sector investor. The key question is whether the design of the power purchase agreement (PPA) will yield a high enough rate of return to the project to be bankable, while at the same time yielding a positive net financial and economic present value to the electric utility and the country respectively. The PPA results in a negative outcome for the economy of Cape Verde in almost all circumstances. In contrast the owners of the IPP are guaranteed a very substantial return for their modest investment under all circumstances.
    Keywords: electricity, wind power, power purchase agreement, public-private partnership, Santiago Island (Cape Verde)
    JEL: D61 E22 Q42 L94 O55
    Date: 2016–05
  61. By: Julius Stakenas (Bank of Lithuania); Rasa Stasiukynaite (Bank of Lithuania)
    Abstract: In this paper we study the effect of a (standard) monetary policy shock in the euro area on the Lithuanian economy. For this purpose we employ a structural vector autoregressive (SVAR) model incorporating variables from both, the euro area and Lithuania. We identify the system using short-term zero restrictions. The model exhibits a block exogenous structure to account for the fact that Lithuania is a small economy and Lithuanian macro variables do not have a significant effect on the euro area variables. In general, we find that a monetary policy shock in the euro area has a stronger effect on the Lithuanian economy than it does on the euro area economy, though the effects are not significant, preventing firm conclusions. We further broaden our analysis employing a panel VAR model for the three Baltic states. This allows us to not only explore the time variation of the euro area monetary policy transmission in the Baltics, but also helps to verify our initial results. The effects are stronger when estimated using the panel VAR model.
    Keywords: monetary policy, SVAR, panel VAR
    JEL: C32 C33 E52
    Date: 2016–04–04
  62. By: Robert E. Hall
    Abstract: Over the past few decades, worldwide real interest rates have trended downward. The real interest rate describes the terms of trade between risk-tolerant and risk-averse investors. Debt pays off equally across contingencies at a given future date, so debt is valuable to risk-averse investors to smooth consumption across those contingencies. In an equilibrium with trade between investors who differ in attitudes toward risk, the risk-tolerant investors will borrow from the risk-averse ones, shifting the risk to those whose preferences favor taking on risk. In the case where investors have preferences that are additively separable in future states and in time, attitudes toward risk are heterogeneous among investors if they differ in the curvature of their utility kernels and differ in their beliefs about the probabilities of outcomes, especially adverse outcomes. If the composition of investors shifts toward those with higher curvature (higher coefficients of relative risk aversion) and toward investors who believe in higher probabilities of bad events, the real interest rate falls. The paper calculates likely magnitudes of the decline and presents evidence in favor of a shift in the composition of investors toward the more risk-averse. The downward trend in real interest rates is a significant problem for monetary policy but is helpful to heavily indebted countries.
    JEL: E43 G12
    Date: 2016–04
  63. By: International Monetary Fund
    Abstract: Adjusting to shocks. The Malaysian economy has faced a sequence of shocks since mid-2014, including declines in commodity prices, spillovers from China, volatility of capital flows, and domestic political controversy. The economy’s adjustment is aided by its diversified production and export bases, deep financial markets, strong regulatory framework, strong external position, flexible exchange rates, and responsive fiscal policy and reforms. Outlook. The outlook for 2016 is shrouded in uncertainties, owing to a confluence of factors that include the global and regional trade slowdowns; China spillovers; the normalization path of U.S. interest rates; and the uneven strength of activity in Malaysia’s other major trading partners. Nevertheless, growth should remain healthy at 4.4 percent.
  64. By: John H. Cochrane
    Abstract: I survey the macro-finance literature related to "By Force of Habit." I show how many models reflect the same rough ideas, each with strengths and weaknesses. I outline how such models may illuminate macroeconomics, by putting time-varying risk aversion, risk-bearing capacity, and precautionary savings at the center of recessions, rather than constraints on flows as in old Keynesian models, or intertemporal substitution and riskfree rate variation as in new Keynesian models. Throughout I emphasize unsolved questions and profitable avenues for research.
    Date: 2016–03
  65. By: Mirela Sorina Miescu (Queen Mary University of London)
    Abstract: This paper assesses that participation of countries in IMF programs significantly diminishes their vulnerability to external shocks. Currently, one of the primary purposes of the IMF is to ensure global stability. As such, the Fund has the responsibility of advising member countries on the financial and economic policies that promote stability, helping to avoid crises and smoothing the adjustment to exogenous shocks. We employ a Bayesian Vector Autore gressive model to obtain a measure for the exposure of countries to external shocks. We then use an Instrumental Variable approach and we show that participation in the IMF arrangements has a significant impact in decreasing the sensitivity to exogenous shocks. Despite the criticism concerning the effects of the IMF loans on the economy of the recipient country, our results provide clear evidence that the Fund is efficient in helping member countries to build a strong economic resilience. These results are of considerable in terest since shocks and crises are a systematic feature of the global economy which affects both developing and developed countries.
    Keywords: Bayesian VAR, IMF, Spillovers
    JEL: F33 C11 C13 C3 E3
    Date: 2016–04
  66. By: Sultanum, Bruno (Federal Reserve Bank of Richmond)
    Abstract: This paper studies the interaction between financial fragility and over-the-counter markets. In the model, the financial sector is composed of a large number of investors divided into different groups, which are interpreted as financial institutions, and a large number of dealers. Financial institutions and dealers trade assets in an over-the-counter market à la Duffie et al. (2005) and Lagos and Rocheteau (2009). Investors are subject to privately observed preference shocks, and financial institutions use the balanced team mechanism, proposed by Athey and Segal (2013), to implement an efficient risk-sharing arrangement among its investors. I show that when the market is more liquid, in the sense that the searchfriction is mild, the economy is more likely to have a unique equilibrium and, therefore, is not fragile. However, when the search friction is severe, I provide examples with run equilibria—where investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same. In terms of welfare, I find that, conditional on bank runs existing, the welfare impact of the search friction is ambiguous. The reason is that, during runs, trade is inefficient and, as a result, a friction that reduces trade during runs has the potential to improve welfare. This result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare.
    JEL: D82 E58 G01 G21
    Date: 2016–04–13
  67. By: Catherine Prettner (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper offers a re-assessment of the finance-growth nexus in a framework that allows to distinguish between short-run versus long-run effects. Our dataset contains information on 45 developed and developing countries over the period 1995-2011. We make use of the integration and cointegration properties of the data, establish a cointegrating relation and derive the long-run elasticities of per capita GDP with respect to employment, the physical capital stock, and financial development. We employ these results to specify an error correction model and assess whether the years of crisis have changed the relationship between finance and growth.
    Keywords: Finance-Growth Nexus, Panel Cointegration, Error Correction Model, Threshold Model, End-of-sample instability
    JEL: E44 F43 F65
    Date: 2016–05
  68. By: Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng (Cardiff Business School)
    Abstract: Indirect inference testing can be carried out with a variety of auxiliary models. Asymptotically these different models make no difference. However, in small samples power can differ. We explore small sample power with three different auxiliary models: a VAR, average Impulse Response Functions and Moments. The latter corresponds to the Simulated Moments Method. We find that in a small macro model there is no difference in power. But in a large complex macro model the power with Moments rises more slowly with increasing misspecification than with the other two which remain similar.
    Keywords: : Indirect Inference; DGSE model; Auxiliary Models; Simulated Moments Method
    JEL: C12 C32 C52 E1
    Date: 2016–05
  69. By: Eamon Duede; Victor Zhorin
    Abstract: Macroeconomic theories of growth and wealth distribution have an outsized influence on national and international social and economic policy. Yet, due to a relative lack of reliable, system wide data, many such theories remain, at best, unvalidated and, at worst, misleading. In this paper, we introduce a novel economic observatory and framework for high resolution comparison and assessment of the distributional impact of economic development through remote sensing of the earth's surface. Striking visual and empirical validation is observed for broad macroeconomic sigma-convergence in the period immediately following the end of the Cold war as well as strong global divergence dynamics immediately following the financial crisis and Great Recession, the rise of China, the decline of U.S. manufacturing, the euro crisis, Arab Spring, and Middle East conflicts.
    Date: 2016–04
  70. By: Tiago Berriel (Department of Economics PUC-Rio); Rodrigo Abreu (EPGE-FGV)
    Abstract: This paper explores the interaction between a credit crunch and the maturityof government debt, focusing on its impacts on an economy with heterogeneoushouseholds. We nd that an increase in debt maturity helps softening the economicslump that follows a credit crisis. We show that, immediately after the credit shock,there is an output drop of nearly 1% when the asset available has on average onequarter of maturity, while a contraction of only 0.6% follows when debt durationhas three quarters. The rise of asset duration indirectly enhances the income eectsunleashed by general equilibrium price dynamics, which benets bondholders andthus softens the recession. On the other hand, an increase on debt duration impairsthe improvement of wealth distribution on the long run. The main contributionthis paper paper is to show that debt maturity is a key element to understand themagnitude of a recession driven by credit and its welfare consequences.
    Date: 2015–08
  71. By: Islamaj, Ergys; Kose, Ayhan
    Abstract: This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.
    Keywords: Consumption Sensitivity; Financial Integration; Intertemporal Smoothing; Risk Sharing
    JEL: E21 F02 F4
    Date: 2016–04
  72. By: Ergys Islamaj; M. Ayhan Kose
    Abstract: This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.
    Keywords: Consumption Sensitivity, Financial Integration, Risk Sharing, Intertemporal Smoothing
    JEL: E21 F02 F4
    Date: 2016–05
  73. By: ABE Naohito; INAKURA Noriko; TONOGI Akiyuki
    Abstract: Using commodity-level transaction data, we estimate aggregate demand and supply shocks. When using this for continuing goods, i.e., those that exist in both the current and the base periods, the demand shock preceding a change in the consumption tax rate in Japan on April 1, 2014 is negligible. This contradicts the conventional viewpoint on stockpiling behavior before a tax rate increase. However, when considering new goods appearing within a year, the estimated demand shock becomes positive, which suggests that product turnover is critical when estimating demand shocks. Following the sharp and temporary fall associated with the Great East Japan Earthquake in 2011, the estimated supply shocks were virtually zero until the end of 2013. The supply shocks then became negative and remained at a very low level until the change in the consumption tax rate, which suggests that the increases in the prices during this period reflect, at least in parts, an inward shift of the supply curves.
    Date: 2016–03
  74. By: Wyatt J. Brooks; Pau S. Pujolas
    Abstract: We compare the welfare gains from a reduction in trade costs implied by a dynamic model with capital accumulation to a standard static trade model. The static and dynamic trade models differ in their welfare implications along four dimensions: transition costs, endogenous capital, composition of expenditure between investment and consumption goods, and computation of the trade elasticity. We provide a theoretical decomposition of these four effects, then quantify them in a parameterized example. Gains from trade differ considerably in the two models, even though they imply the same trade elasticity and import penetration ratio. In our base case, removal of a 100% trade cost increases welfare by 14% in the static model and 20% in the dynamic model. Our decomposition demonstrates that the most important difference between the two models is the endogeneity of capital.
    Keywords: Gains from Trade, Capital Accumulation, Static Gains, Dynamic Gains
    JEL: E13 F11 F41
    Date: 2016–03

This nep-mac issue is ©2016 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.